Ferrari’s stock is overpriced and set to under-deliver. I know, that’s not the type of statement that you would expect to see surrounding a stock that represents one of the most popular automobiles on the planet. However, it’s the truth. The reality is that from the time of its IPO, RACE was incredibly overpriced. Unfortunately, it will take some time before the company reaches a point at which its stock is worth investing in. Today, we’ll talk about the IPO, why I believe that Ferrari is overpriced and what we can expect to see from the stock moving forward.

Ferrari’s IPO Went Off Without A Hitch

About a month ago, Ferrari launched its IPO. The initial price of the stock came in at $52 per share. In the first day, the stock rallied, gaining more than 10% as it opened. However, since then, we’ve seen tremendous declines in the value of the stock and for good reason…

Why RACE Has Declined Since Its IPO

Following its first day on the market, the price for Ferrari’s stock was clearly too high. After the vast improvement we saw on its first day in the market, Ferrari’s price to earnings ratio climbed to nearly 40. While this PE and even higher PE ratios may be accepted in companies with incredibly high growth potentials, this simply isn’t an accepted PE ratio among stocks in the luxury automobile space. Just take a look at the PE ratios among the leaders in the space…

Daimler – PE ratio of 10.

BMW – PE ratio of 10.

Rolls Royce – PE ratio of below 10.

Considering that three of the luxury automobile stocks that Ferrari is contending with all have PE ratios at or below 10, it simply doesn’t make sense that Ferrari is worth the massive PE ratio it is currently trading at. Even after the declines we’ve seen in the stock, RACE is trading at a PE ratio of nearly 28. This is simply unheard of and far from warranted.

Another Big Issue Is Coming For Ferrari

In an attempt to justify the overwhelmingly high IPO price offered by the company, Ferrari announced that they will be working to increase production. In fact, they stated that by the year 2019, they intend on increasing production from 7,000 units per year to 9,000 units per year. Nonetheless, this creates another issue for Ferrari and its investors. The reason is relatively simple to understand…

One of the biggest reasons that consumers purchase Ferrari is the fact that the cars are relatively unique. These luxury cars come with the concept of being one of very few on the road, that privileged in knowing that the car is hard to get your hands on. However, if the company does ramp up production, the exclusivity in owning a Ferrari is diminished. After all, the more of these cars that are on the road, the less valuable they become. This isn’t the first time we’ve seen a luxury brand do this. In fact, throughout history, many luxury brands have made the decision to increase production, only to reverse that decision shortly after increased production starts.

What We Can Expect To See From Ferrari Moving Forward

Unfortunately, I’m expecting to see nothing more than declines out of this stock until the price is brought down to a more sustainable rate. The reality is that Ferrari is a great company. However, it doesn’t have the growth potential it would need to justify such a high PE ratio. Not to mention, attempts to increase production are likely to work against the brand. All in all, I would stay away from this stock until I saw that the PE ratio declined dramatically.

What Do You Think?

What do you expect to see from RACE moving forward? Let us know your opinion in the comments below!

Joshua Rodriguez is the owner and founder of CNA Finance. He is also a partner here at Modest Money. His analysis has been featured on Investing.com, Yahoo! Finance, Google Finance, Google News, and many others. To connect with Joshua, follow him on Twitter @CNAFinance.

I thought that Ferrari’s IPO price was also extraordinarily high too. I’m going to bet on “reversion to the mean” on this one. If other luxury automakers are consistently around a 10 P/E, then I’m shorting the stock. 🙂